After Paying for Sector’s Sins, Newly Public SolarCity Expects to Win Over Investors

For SolarCity‘s board of directors, bankers and other parties intensely interested in its journey to the public markets, it’s been a tense few days.

The company, which successfully debuted on the Nasdaq Stock Market on Thursday after a delay and pricing below estimates, at one point debated whether to pull back the listing and wait it out, said Lyndon Rive, SolarCity’s co-founder and chief executive.

When the decision was made to go out, the company galloped out the door. Shares closed at $11.79, up 47% from IPO price of $8, but still below the original estimate of $13 to $15.

“We underestimated … how much the investors had lost in the solar sector, how deep the scars were,” said Mr. Rive, of the difficult journey and the lower price the company was forced to take. “No one was willing to take any risk whatsoever on anything associated with solar,” he said, adding that the fundamental business of SolarCity is very different from that of solar panel makers that scarred the market.

The decision to take the risk and price the IPO was motivated by several factors, including the view that investors needed to see the company trade before they would give it the value it hopes for, according to Mr. Rive. “Elon reached out to some institutional investors,” said Mr. Rive about his cousin Elon Musk, chairman of SolarCity, as well as CEO of Tesla Motors and Space Exploration Technologies and co-founder of PayPal.

The takeaway from those conversations, said Mr. Rive, was that, “If you go now, you’ll get the opportunity to educate the market.”

A person familiar with the discussions by SolarCity’s main players over the IPO said that the company wanted to go public before the end of the year, when the economy could become more susceptible to government decisions on the country’s fiscal woes.

SolarCity also felt some pressure, the person said, to serve as a good story in the clean-technology space, which has seen few successes. To pull the IPO could have meant sealing the idea in public investors’ minds that a clean-tech IPO is an impossible proposition.

But Mr. Rive said that was completely secondary. He said SolarCity’s goal is to build out a renewable energy infrastructure. “Whether that does or doesn’t support the clean-tech sector, I’m not that worried about that,” he said.

San Mateo, Calif.-based SolarCity, which installs, leases and finances solar systems for residential and commercial customers, is backed by such investors as Mr. Musk, Silver Lake Kraftwerk, a recently launched fund backed in part by George Soros, and venture firms Draper Fisher Jurvetson and DBL Investors. Mr. Musk, DFJ and DBL bought shares in the IPO.

The company filed to go public in the spring, under a provision of the JOBS Act that allowed it to not make its S-1 registration public for some time.

SolarCity’s bankers, headlined by Goldman Sachs & Co., had initial conversations with analysts, with some of these analysts pegging the valuation of SolarCity at $2 billion, according to the person familiar with the discussions. The company and its underwriters set a price range of $13 to $15 a share for 10 million shares in late November, implying a valuation of roughly $1 billion.

Once the roadshow began, it soon became clear that it was difficult to line up investors, according to a manager of a fund that invests in public equities who attended one of the roadshow events.

Bankers attempted to appeal to different sets of investors, trying to tell a complicated story of what kind of company SolarCity is, this person said. It looks like a utility, because it charges homeowners for electricity it provides. It also looks like an equipment financing company, because it leases solar systems. And it is a solar company, albeit not one that makes solar panels, but rather one that deploys them.

Each set of investors had some issues with SolarCity, according to the fund manager. One of its problems, the fund manager said, is that there are few comparables in the public markets today that could offer a valuation perspective. (One other solar installation company, Real Goods Solar Inc., has been served several delisting notices by Nasdaq in recent months and has a market cap of about $22 million today.)

The fund manager who looked at the stock but decided to pass said that he expected only buyers with experience in solar to consider buying into SolarCity. But solar investors lost massive amounts of money over the past two years by betting on manufacturers that overbuilt factories and saw prices for their products fall. As a result “there aren’t a lot of people going to investment committees saying, ‘This one is different,’” the fund manager said.

Enphase Energy, a maker of electronic components used in solar installations, went public in March at a discount to its initial range. With its venture backers such as Kleiner Perkins Caufield & Byers buying into the IPO, it still went on to lose more than half of its value.

Other investor concerns included that SolarCity’s operating expenses outpaced revenue increases. It had a net loss of $78 million for the nine months ended Sept. 31, 2012, up from $56.7 million in the same period in 2011. The company’s argument has been that it locks up revenue for 20 years, adding predictability to its business, and that it has $858.7 million of property and equipment that it owns.

Bankers came back from discussions with the realization that the range of $13 to $15 was not going to get sufficient interest, according to the person. They told the board that two significant institutions said they were willing to purchase SolarCity shares for $8 to $9 in the IPO and would likely then hold the shares for some time, according to the person.

The board debated whether to submit to the haircut or pull the IPO. The company cut the price to $8, increased the number of shares, causing further dilution to existing investors, and delayed the IPO by a day, before finally entering the public market.

In total, the $92 million deal brought in 40% less than the most-optimistic numbers provided in the company’s prospectus.

Ultimately, Mr. Rive said, the IPO will “give [investors] an opportunity to grow with us.”

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